The Critical Story Behind JPMorgan's Earnings Report

Boring banking is back in style.

His superbank bank just reported record third-quarter earnings. Net income was $5.7 billion, up from $4.3 billion a year earlier: a massive 33% increase. If you think the country's biggest bank by assets got there by flogging some fantastically byzantine derivatives product, think again. That 33% increase came in large part through the age-old, thoroughly boring practice of mortgage lending.

This is just what the architects of Dodd-Frank intended, and it's a good omen for the U.S. banking sector, as well as the rest of us.

Hit me with your simplest shotOtherwise known as the Wall Street Reform and Consumer Protection Act, Dodd-Frank was the federal government's response to the financial crisis. It's comprehensive, touching on just about every aspect of U.S. financial markets. This comprehensiveness, however, means it can also be difficult for banks to get their arms around.

But shining through the denseness of Dodd-Frank is the Volcker Rule. Named after ex-Federal Reserve Chairman Paul Volcker, it simply states that no bank may engage in proprietary trading -- that is, invest its own money for its own profit.

Because of the Volker Rule's simplicity and directness (the specific details of which have yet to be finalized), banks have been reshaping their revenue models away from very lucrative but dangerous moneymakers like derivatives trading, and getting back into less lucrative but infinitely more stable lines of business like mortgage lending.

We're not a hypothetical bankJPMorgan's mortgage-related revenue for the third quarter hit a record $1.8 billion, up 36% from the same quarter last year. Luckily for the banking sector, the housing market is finally -- knock on wood -- beginning to turn around. And the promise of $40 billion per month in mortgage-backed securities purchases promised as a part of the Fed's third round of quantitative easing, while not impacting these numbers very significantly, will likely keep the mortgage-related revenue ball rolling for JPMorgan.

And it's not just the House of Dimon making hay from home-buyers and home-refinancers. Fellow superbank and ubiquitous home-lender Wells Fargo's (NYSE:WFC) third-quarter mortgage-related revenues were up, too -- by 50%. For Wall Street's other major players, third-quarter earnings -- and relevant information on mortgage-related gains -- aren't in yet, but there's still plenty of evidence out there that Dodd-Frank and the Volcker Rule are having their intended effect:

Goldman Sachs(NYSE:GS) recently opened a private bank-within-a-bank to cater to its wealthiest clients and already has $13.8 billion on the books to show for it. "We're a bank," CEO Lloyd Blankfein told The Wall Street Journal in July. "It's not a hypothetical ... We have the regulations. We have the costs. We have the burdens. It is a no-brainer that we'll build our banking business."

Morgan Stanley(NYSE:MS) recently inked a deal with Citigroup(NYSE:C) to buy out the remainder of Morgan Stanley Smith Barney, their joint-venture brokerage. Morgan, the Wall Street bank that came out of the financial crisis in arguably the worst shape of them all, still hasn't found its footing sans the vanishing proprietary-trading model. As such, Morgan is placing many of its eggs in the MSSB (recently rechristened Morgan Stanley Wealth Management) basket.

Boring banks are back in styleIf you do happen to run into Jamie Dimon anytime soon, and you have the opportunity to ask him what he thinks of derivatives trading, be prepared for a primal roar followed by a string of obscenities. The bank just endured a $5.8 billion loss, and a major organizational overhaul, due to a derivatives deal gone terribly wrong: the infamous London Whale trade. JPMorgan is still mopping up that one.

Boring banking is slowly coming back into style, whether the banks like it or not, and that's OK. In the end, a traditional, less-volatile banking model is in everyone's best interests. Because whether you're a banker, an investor, or a consumer, the less likely banks are to blow up, the better. Dodd-Frank isn't perfect, but it seems to be doing the job it was designed to do -- making banking a bit more boring -- and for that, we can all be grateful.

One big bank not mentioned today, but one that's always on everyone's mind, is Bank of America. Check out The Motley Fool's new in-depth company report on B of A. It thoroughly details the superbank's prospects and gives three reasons to buy and three reasons to sell. Just click here to get access. Thanks for reading, and for thinking.